Using Credit Wisely

Knowing your credit history is a crucial step in the home buying process. If your credit history is poor, it may take a few months or more to start you on the road to better credit. Therefore, it is a good idea to begin now, even if the home buying process is a while away for you.

What is a Credit Score?

A credit score is one of the many pieces of information that is used when evaluating a mortgage loan application. Your credit score is determined by summarizing a number of factors in your credit report, including your payment history, outstanding debts, credit history, credit inquiries and types of credit. Your credit score considers all of the information in the credit report and converts this into a number that helps the lender determine the likelihood that you will repay your loan on time.

Obtaining Your Credit Record

To obtain a copy of your credit report, look in the yellow pages under Credit Reporting Agencies to find a location near you. They may also have a web site that can provide you this information as well. You usually need to sign a release and pay a small fee to obtain the report. Occasionally, there is incorrect information on credit reports, especially if you have a common last name. It is crucial that this information is corrected and any disputes reconciled before you apply for a mortgage. This will speed the application process and increase your chances of qualifying.

Credit Record Errors

If there is incorrect information on your credit report, you will need to contact the credit bureau that generated the report in order to take corrective action. The bureau is required to provide a trained employee to explain the report to you. If you wish to dispute information on the credit report, submit your claim to the credit bureau in writing. The bureau must investigate the data and remove it from your report if it cannot be verified or if it is incorrect. After the change is made, at your request, the bureau must notify prior lenders who were misinformed. If the bureau determines that the data is correct after its investigation, you may add a statement to your file explaining your side of the story. If your mortgage application was declined, you will need to contact the credit agency cited in your rejection letter within 60 days to request a free copy of your report.

Repairing Credit Record Errors

There are no “quick fixes” for a poor credit history, so don’t be taken in by advertisements from companies that promise to improve your credit rating or give you credit you can’t afford to repay. Chronic late payments, delinquent accounts or judgments can remain on your credit report for seven years. If it is a matter of making late payments, make sure your accounts are brought up to date. For more serious problems, you may be able to negotiate new terms and repayment schedules with your creditors. Your creditor may charge a higher interest rate for this, but at least your credit rating will eventually improve.

If you need help, not-for-profit counseling services can assist you in obtaining your credit report and resolving discrepancies on your report. Such agencies also offer budget counseling. Look in the yellow pages in your phone book under Credit Counseling Services or on the Internet to find an agency located near you.

Nontraditional Credit History

You may need to rely on a nontraditional credit history if you have purchased consumer goods with cash instead of using credit cards or installment loans. You can often work with a lender to develop a credit history by verifying records of regular monthly obligations that are not generally reflected in traditional credit reports, like utility bills, rent payments, telephone bills, and regular financial obligations for other services.

Budgeting

Even if you don't have any credit problems, you should still establish a realistic budget for your household. A budget will help you determine how you spend your money and show you where you may be able to cut expenses. This will help you to save for the down payment and closing costs as well as the expenses you will have in your new home. As a homeowner, you will be responsible for expenses that you never were responsible for as a renter. Appliances may break, the plumbing may need to be fixed, the roof may leak...the list is endless. In the first year of homeownership, there are also many one-time purchases, such as lawn mowers, garbage cans, window blinds, furniture, appliances, etc. Be sure to account for these purchases when establishing a budget.